ILIT’s Do not Have to be About Estate Taxes

An ILIT is the standard acronym in the industry for Irrevocable Life Insurance Trust.  An ILIT is one of the most dynamic estate planning tools available and that’s why I mention them from time to time. The key on this blog post is the idea that an ILIT need not have anything to do with estate taxes.

Historically ILITs were used to create a tax free fund of money. With the current five million dollar ($5,000,000) exemption from federal estate taxes a lot less people are worried about estate taxes.  Of course the law is set to sunset December 31, 2012 and go back to ONE million dollars ($1,000,000) on January 1, 2013 but let’s put that concern aside for the moment. Let’s assume you do not have any estate tax concerns. Read on because this article will have a great idea to provide tremendous value to your family!

Let’s say you are a professional making a nice salary. Let’s say you have a husband and two young kids.  Like most people you want to provide for your husband and also your kids.  What if you could give them money tax free and with CREDITOR PROTECTION built in!?  Well, that’s what an ILIT can do for you and your family. The way it works is this….

Let’s say you want to provide a two million dollar death benefit to your family should you die prematurely.  Term life insurance, especially at young ages, can be purchased for pennies on the dollar.  I am not a life insurance salesperson but let’s assume you get two million dollars of term death benefit for $200/month. That’s a wild guess but let’s go with it.  Obviously the odds are in your favor that you will not die during the term of the term life insurance. Maybe it’s 10 or 20 years.  However, IF you die during that time your family will thank you forever for having the thoughtfulness of having two million dollars of death benefit. Even in today’s days of .002 percent interest most people can live decently with two mil in the bank!

Life insurance is often can distribute tax free after death but not always. There are many situations where it can create a taxable event. Thus proper planning is important. However, it can be made to be tax free with an ILIT if set up properly.

Ok, but why an ILIT?  An ILIT creates creditor protection for your spouse and kids. The two million would sit in an investment account, in the name of the trust, and in most cases the spouse can even be the trustee in charge of distributing assets! However, a properly drafted ILIT has built in asset protection so that their creditors can not get that money! It’s an incredible tool.  TAX FREE MONEY WITH CREDITOR PROTECTION BUILT IN!

The simple mechanics are you hire an attorney, like me, to set up an ILIT for you. The ILIT then purchases a life insurance policy (term or whole life) on your life. Each year you gift money to the ILIT trustee (usually a trusted friend) who pays the premiums of the life insurance. When you die the trustee claims the death benefit, invests it in the name of the ILIT, and then distributes the funds to the beneficiaries you have selected in the trust. It’s really simple!

The costs are not great to set up an ILIT and the combination of tax savings and creditor protection are truly PRICELESS!

Contact me to discuss your situation to see if an ILIT will help you!  -John

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